Baidu Beats Q3 Outlook, Issues Weak Q4 Outlook

Chinese search engine giant Baidu, Inc. (NASDAQ: BIDU) reported third-quarter earnings that were almost double than anticipated by analysts. The revenue was in line with the Wall Street expectations. Still, the stock lost about $30 to trade at $230 levels. Baidu issued Q4 outlook below analysts’ expectations. That resulted in a sharp decline in the share price. However, we anticipate a recovery in the share price due to reasons given below.

During the third-quarter that ended September 2017, Baidu recorded total revenues of RMB 23.50 billion ($3.53 billion), an increase of 29% from RMB18.253 billion in the same period of fiscal 2016. Mobile sales represented 72% of total revenues, an increase from 62% in the prior year’s corresponding quarter.

The company reported Q3 2017 GAAP net income of RMB 7.949 billion, or RMB 24.09 per ADS, compared with RMB 3.102 billion, or RMB 8.51 per ADS, in the year-ago period.

Excluding charges, the 3Q17 non-GAAP net income was RMB 9.076 billion, or RMB 25.94 per ADS, up from non-GAAP net income of RMB 3.447 billion, or RMB 9.92 per ADS, in 3Q16. The Wall Street analysts had expected Baidu to report earnings of RMB 13.55 billion ($2.04 billion) on revenues of RMB 23.6 billion ($3.56 billion).

Segment wise, Online marketing services posted Q3 revenue of RMB 20.11 billion, an increase of 21.94% from last year. At the end of third-quarter, Baidu had about 486,000 active online marketing customers, a decrease of 7% from last year. However, revenue per online marketing customer was approximately RMB 40,900 ($6,147), up 31% from the corresponding quarter in 2016. Other services revenue almost doubled to RMB 3.381 billion.

Traffic acquisition costs were RMB 2.5 billion ($372 million), representing 10.5% of total revenues, compared with 14.2% in the year-ago period. Similarly bandwidth costs were RMB 1.4 billion ($216 million), representing 6.1% of total revenues, compared to 6.8% last year. Content costs were RMB 3.90 billion ($586 million), accounting for 16.6% of total revenues, compared to 12.1% in the third-quarter last year.

The company anticipates total revenues of between RMB 22.23 billion ($3.34 billion) and RMB 23.41 billion ($3.52 billion) in the fourth quarter of 2017. That represents a y-o-y growth of 22% to 29%. The Consensus estimate of analysts was RMB 24.8 billion ($3.73 billion) for the current quarter. The weak guidance pushed the stock downwards. However, considering the revenue growth rate projected by the company and strong third-quarter earnings, we forecast a bullish trend reversal in the stock price.

The stock has found support at 236 levels, as indicated in the historic price chart below. Further, the William Vix-Fix indicator has fallen from the recent high. That means the selling pressure is subsiding. So, we can anticipate a short-term uptrend in the stock. The next major resistance for the stock is at 260.

An investment in a call option would benefit us from an impending rally in the stock. We would consider investing as long as the binary broker offers a contract which remains active for a week. Further, the stock should trade at about $238 in the US stock market.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.

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